Knowledge Base

Corporate Frauds and Auditors Responsibility

Corporate Frauds & Auditors Responsibility(Brief Overview)

Corporate Frauds & Auditors Responsibility(Brief Overview): Corporate Frauds and Auditors Responsibility , The Companies Act, 2013, has introduced several new reporting requirements for statutory auditors. Section 143(12) requires statutory auditors to report to the government about frauds / suspected fraud committed against the company by the officers or employees of the company. The ministry of corporate affairs has also introduced the Companies (Auditor’s Report) Order, 2015, which also talks about fraud report. Now you can scroll down below n check more details regarding Corporate Frauds and Auditors Responsibility

Corporate Frauds & Auditors Responsibility(Brief Overview)

Corporate Frauds and Auditors Responsibility

That brings us to a case where a dispute recently arose between the cost auditor and the management of a public sector undertaking (PSU). While auditing at a branch office of the PSU, the cost auditor found that the company had filed a FIR with the local police station about the theft of some raw materials for production, worth several lakhs. The auditor, on further verification, found out that the police could not recover the materials even after the passage of months. The auditor also found that neither was the above fact disclosed by the financial auditor in the audit report, nor was any provision made in the books of the audited accounts. It meant that the profit was overstated, leading to excess payment of income tax and dividend.

The auditor mentioned this fact in his audit report because according to CAS 6 on material cost accounting, any abnormal material loss must be reported by the auditor and it should be excluded from the cost of production, and charged under the profit and loss account of the company. Relevant provisions of section 447 of the Companies Act, 2013, also speak likewise.

The company management, however, disagreed with the auditor. They were of the opinion that the matter was beyond the limits of cost audit and the cost auditor had overstepped his boundaries. Section 447, the management said, deals with fraud and missing raw materials was not such a case. It was merely a case of mistake

The cost auditor, on his part, was of the opinion that it was impossible to differentiate between mistakes and frauds. In PSUs, all mistakes are treated as frauds and the auditor has no responsibility to determine whether a misappropriation was mistake or fraud. Moreover, in this case, the company suffered losses by paying income tax and dividend on excess profit because of not provisioning the losses

The dispute continued for long and the cost auditor did not cede his ground. But it nonetheless raised questions about the provisions of the Companies Act and the decision of the cost auditor. There’s no hiding the fact that corporate fraud is a major problem in our country and has increased in leaps and bounds over the past few decades. The growing number of frauds have undermined the integrity of financial reports, contributed to substantial economic losses, and eroded investor confidence regarding the usefulness and reliability of accounting statements. The increasing number of white-collar crimes demands stiff penalties, exemplary punishments, and effective enforcement of law with the right spirit. India, for the record, has witnessed several corporate frauds. The 5,000 crore Harshad Mehta scam in 1992, the 7,000 crore Satyam fiasco in 2009, and the 27,000 crore Sahara case which began in 2010, are all currently sub-judice in the court. Before the Companies Act 2013 came into being, corporate frauds were largely seen as a broad legal concept. The Act fixed the responsibility on auditors to detect as well as report corporate frauds. Let us first try to find out what is fraud under the Companies Act, 2013. Section 447(1) of the Companies Act, says: “Fraud’ in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person whether or not there is any wrongful gain or wrongful loss.’

Wrongful gain, in turn, has been explained as ‘the gain by unlawful means of property to which the person gaining is not legally entitled and “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.’

Fraud, according to section 17 of the Indian Contract Act, 1872, ‘includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his not cede his ground. But it nonetheless raised questions about the provisions of the Companies Act and the decision of the cost auditor

There’s no hiding the fact that corporate fraud is a major problem in our country and has increased in leaps and bounds over the past few decades. The growing number of frauds have undermined the integrity of financial reports, contributed to substantial economic losses, and eroded investor confidence regarding the usefulness and reliability of accounting statements. The increasing number of white-collar crimes demands stiff penalties, exemplary punishments, and effective enforcement of law with the right spirit

India, for the record, has witnessed several corporate frauds. The 5,000 crore Harshad Mehta scam in 1992, the 7,000 crore Satyam fiasco in 2009, and the 27,000 crore Sahara case which began in 2010, are all currently sub-judice in the court.

Before the Companies Act 2013 came into being, corporate frauds were largely seen as a broad legal concept. The Act fixed the responsibility on auditors to detect as well as report corporate frauds.

Let us first try to find out what is fraud under the Companies Act, 2013.

Section 447(1) of the Companies Act, says: “Fraud’ in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person whether or not there is any wrongful gain or wrongful loss.’ Wrongful gain, in turn, has been explained as ‘the gain by unlawful means of property to which the person gaining is not legally entitled and “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.’ Fraud, according to section 17 of the Indian Contract Act, 1872, ‘includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract—the suggestion as a fact, of that which is not true, by one who does not believe it to be true; the active concealment of a fact by one having knowledge or belief of the fact; a promise made without any intention of performing it; any other act fitted to deceive; any such act or omission as the law specially declares to be fraudulent.’